Published: 20th November 2014

The last Regulatory Roundup (No 59) advised that a new chapter in COBS came into force on 1 October – COBS 22 “Restrictions on distribution of contingent convertible instruments” (‘CoCos’). The chapter derives from temporary product intervention rules and will cease to have an effect on 1 October 2015 (COBS 22.1.1(4)). The effect is to prevent the sale to, or the purchase by, retail clients in the EEA of these instruments. There are limited exemptions available e.g. certified high net worth investors.

The FCA has had further thoughts on the matter and is now consulting (CP14/23 “Restrictions on the retail distribution of regulatory capital instruments”) on making the restrictions permanent. The restrictions will now capture CoCo funds as well (the definition of the latter will capture funds which are “wholly or predominantly linked to..” CoCos). In addition the FCA wishes to extend a similar restriction to mutual society shares.

Suitability guidance (COBS 9.3) will be amended to draw attention to firms of the restrictions imposed on CoCos etc. Discretionary investment managers are reminded that any purchases of such instruments for a retail client’s portfolio should be supported by “detailed and robust justification” of the assessment of its suitability in the portfolio.

The draft rules can be found in Appendix 1 of CP14/23.

The consultation period ends 29th January 2015.

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